Dark Days for the Channel Tunnel

By ROGER COHEN,

Published: May 28, 1992

PARIS, May 27—
Plagued by conflict and delays, the $14.7 billion English Channel tunnel project has degenerated from a grand symbol of European business integration to a financial morass, with one of the leading contractors suggesting this week that the project could face bankruptcy.

The "chunnel," as the 24-mile-long underwater link between Britain and France is sometimes called, was once scheduled to open on June 15 next year. That has been postponed to the last quarter of 1993 at the earliest and may well be put off until 1994 because of financial disagreements and construction delays.

A bitter dispute with contractors over payments and a breach of the loan agreement with the banks that have committed $12.3 billion to the venture have undermined Eurotunnel, the British and French company that will operate the tunnel. Eurotunnel's Shares Decline

Shares in Eurotunnel fell 3.7 percent today on the Paris Bourse after Martin Bouygues, the chairman of the Bouygues construction company of France, said at a news conference on Tuesday that "one cannot completely exclude the hypothesis that Eurotunnel will go bankrupt." He added that "the project has skidded off course, and the situation is bad."

The chunnel's two rail tunnels were completed in May and June of last year, but they still have to be equipped with power systems, signals, air-conditioning and other equipment in what remains a highly complex engineering operation.

On completion, the shuttle service between Sangatte, France, and Folkestone, England, should take 37 minutes.

Mr. Bouygues was the first executive involved with the tunnel to mention a possible bankruptcy. In reaction, Annabel Salmon, a Eurotunnel spokeswoman, said, "We were astonished by this unfounded outburst."

While a bankruptcy could cause large financial losses for investors and creditors of the project, it is unlikely that it would permanently halt the tunnel's completion.

Bouygues, France's largest construction firm, is part of a consortium of five French and five British companies known as Transmanche Link. Transmanche is seeking $2.6 billion in extra payments from Eurotunnel for work already done. The construction companies say Eurotunnel owes them the money because of its ongoing demands for more complex and expensive work.

Eurotunnel is contesting that claim, and company officials suggested that Mr. Bouygues's angry statement might have amounted to posturing. The Bouygues company did not return telephone calls seeking elaboration. But analysts, while generally describing Mr. Bouygues's warning as exaggerated, said the plight of Europe's largest construction project was disturbing. Budget Increased by Billions

"It was originally budgeted at $8.7 billion," said Mark McVicar, an analyst at County NatWest Wood Mackenzie. "Now it's budgeted at $14.7 billion, and we still don't know what the final cost will be. We don't know when the tunnel will open, whether the conflict with contractors will be resolved or what revenue to expect. It's all very vague."

An analyst at UBS Phillips & Drew, who insisted on anonymity, said that "the risk of investing in Eurotunnel is now enormous, and the possibility of bankruptcy cannot be ruled out."

Eurotunnel, whose shares were floated in 1987, was ordered by an independent aribitration panel in March to begin paying $91 million a month to contractors toward a disputed $2.6 billion claim.

The order was described by Eurotunnel's chief executive, Sir Alastair Morton, as "a hand grenade" tossed into midst of negotiations with contractors, and the company has appealed to the International Chamber of Commerce in Brussels.

Ms. Salmon said negotiations were continuing with contractors on a settlement because arbitration in Brussels could take years.

The two sides are still believed to be about $900 million apart, with Eurotunnel insisting that the contractors had agreed to a fixed payment and the contractors countering that the payment from Eurotunnel must reflect their sharply increased costs.

The dispute appears to be slowing progress on the tunnel. Philippe Montagner, a Bouygues director responsible for the group's tunnel operations, said this week that the tunnel was unlikely to open before March 1994. "Under the best scenario, with everyone working hand in hand, I don't see completion before early 1994," he said.

Every time the completion date is put off, so is the start of much-needed cash flow for the highly indebted Eurotunnel operating company, which has estimated that its first-year revenue will be $1.15 billion.

At least partly because of the delay, the company has defaulted on its loan covenants with the 206-bank syndicate backing the project and is urgently seeking a waiver from the banks to tap into the next vein of their $12.3 billion loan. Eurotunnel has already used about $7.3 billion of that total financing.

Colin Comery, the National Westminster Bank executive heading the team of lead banks, said the whole syndicate would vote on Friday on granting the waiver. He declined to comment on the likely outcome. The agent banks for the syndicate are National Westminster and Midland from Britain and Credit Lyonnais and Banque Nationale de Paris of France.

Asked about Mr. Bouygues's suggestion of a possible Eurotunnel bankruptcy, Mr. Comery said, "I certainly hope it does not come to that."

Analysts said it was almost certain that the banks would approve the waiver to keep Eurotunnel operating.

"Having already paid out $7.28 billion, you don't just pull the plug," said Mr. McVicar of County NatWest Wood Mackenzie.

In all, Eurotunnel has about $16.2 billion of equity and loans. Given the postponements and the disputes with contractors, analysts say the company may be forced to try to raise more money to survive amid skepticism from banks and the stock market.